In our previous lesson Pip In Forex, We mentioned deals to explain pip with buying huge amount of Euro and Dollars ( 10000$ ) which may a quite large, especially for beginners.The important factor comes in, how we can buy huge volume to trade.The Answer is “Use of Leverage In Forex.”
What Is Leverage In Forex
Leverage allow you to trade large amount than your initial investment.When it comes to the investing, Forex is much more accessible due to the use of leverage.So we don’t need to start with a large amount of capital to trade forex.
You have an initial investment 1000$ in your forex account & you decide to buy 100000$ worth of EUR/USD at the current market rate.Your broker allows you to trade 1:500 Forex Leverage.
1:500 leverage basically means you can use 1000X500 =500000$ for forex buying & selling.So if you buy 10000$ worth of EUR/USD with current exchange rate i.e., 1.0450 and you close deal at1.0460 ( 10 Pip Profit ).
Using the pip formula in my previous lesson Pip Calculation, You will get to know how much profit you make with using of leverage.If 1 pip is equal to 10$, you earned 100$ in the transaction.100$ in a single trade only possible with using the leverage.
At the other end, if we didn’t use the leverage that was allowed from the broker, it was not possible to make 100$ in a single deal.
You can use a different level of leverages most broker allow you to trade from 1: 100 to 1: 500.But keep in mind leverage allow you to buy large volume then your total investment.It is also dangerous for your account capital.Because if trade closes against you or your exchange rate de appreciated against your buying currency, you may lose the huge amount of money from your current capital or invested amount.
Brokers only allow you to trade with leverage, but the broker is not with you for your loss.Your loss will be deducted from your capital.
To avoid losing the huge amount of your investment and to take benefits from the leverage, We suggest you to learn proper from basics.
We will discuss Risk Management strategies in our upcoming expert level lessons.To be profitable in , it is necessary to trade with proper planning.I suggest you visit the blog daily to get daily learning lessons.It will improve your knowledge and help you to develop forex skills step by step.